Coins & bullion since 1973
___________________________________________________________

1-800-869-5115

We educate first-time investors.
Expert professional guidance for safe haven investors.

Celebrating our 20th year on the World Wide Web!USAGOLD Coins

USAGOLD Menu BAR



Uses and Abuses of Gresham's Law
in the History of Money

by Robert Mundell
Nobel Prize for Economics, 1999

 

9. Gresham's Law Under Bimetallism

An understanding of Gresham's Law was crucial to the formulation of a correct monetary policy, and it turned out to be especially important under bimetallism. Bimetallism was a system in which one of more countries fix the prices of two of the precious metals in terms of the national currency unit, thus fixing the bimetallic ratio. In the following discussion, I shall assume that the two metals are gold and silver, but the theory applies equally to other metals.

Consider the operation of Gresham's law under bimetallism. Its principles can be studied best in the context of a small country facing a bimetallic price ratio in the rest of the world over which they had no influence. This was not far from the actual situation facing many countries between the end of the Middle Ages until 1873, when bimetallism gave way to the gold standard. To fix ideas suppose the bimetallic price ratio is 15.12:1, and that there is free coinage in the sense that people can bring either of the metals to the mint to be coined.

Suppose now that a new small country arrives on the scene and it sets its bimetallic ratio at 15:1. At this ratio the mint price of gold is lower and the mint price of silver is higher than the world price. In this situation, silver will be brought to the mint to be coined, but no one will bring gold to the mint when its price is lower there than it is abroad.

There would be perpetual disequilibrium if the market price ratios at home and abroad remained different. Equilibrium can exist only when the market price of gold at home has risen to the international level of 15.12:1, which is possible only when all the gold has left the country and the circulation is entirely silver. By overvaluing silver, the country, while nominally bimetallic, has put itself onto a de facto silver standard. Overvaluing a metal makes it "bad money" and brings Gresham's Law into play.

The opposite situation applies if the countries overvalues gold. Suppose the bimetallic ratio is set at 16:1 while, as before, it is 15.12:1 in the rest of the world. In this case the underpriced silver will be exported, gold will be imported and equilibrium will prevail only when the entire circulation is made of gold. By overvaluing gold, the countries moves onto a de facto gold standard. Again Gresham's Law worked when the bad money, in this case overvalued gold, drove out silver.

These examples are not abstract possibilities. They apply precisely to the United States after Alexander Hamilton created the bimetallic system by the Act of April 2, 1792. The dollar (which had been adopted as the monetary unit by the Congress of Confederation in 1786) was defined as 24.75 grains of pure gold and 371.25 grains of pure silver, implying a bimetallic ratio of 371.25/24.75 = 15. At this time the dominant monetary power was France which had in 1785, under Calonne, the able Treasurer-General of Louis XVI, established a bimetallic ratio of 15.12:1. It was by no means clear when the French Revolution began in 1789 what the bimetallic ratio would be in the future; Hamilton had to decide at a time when the international situation was unstable. As it turned out, he guessed wrong. When Napoleon (now Emperor) wanted to reestablish French credit in 1803 he set France back onto bimetallism at the Calonne ratio of 15.12:1. This made silver overvalued and gold undervalued in the United States. As a result the United States was de facto on a silver standard for the first four decades of its history.

In the early decades of the fledgling republic, complaints were heard over and over that gold coins were not available. Discussion continued in Congress until finally, on July 31, 1834, the long-sought reform measure was passed. Astonishingly, at a single blow, the gold dollar was reduced to 23.2 grains, and soon after, the Act of July 18, 1837, to 23.22 grains, the standard being changed at the same time from 11/12 fine to 9/10 fine. This made the bimetallic ratio 16:1. Now gold was overvalued, silver fled and gold rushed in, putting the United States de facto on the gold standard.(52) Silver dollars became extinct and emergency measures came to be required to retain within the country a sufficient amount of small change: the amount of silver in the subsidiary coinage from the half-dollar downward was reduced.(53) Overvaluing gold put the United States (de facto) on the gold standard.

The standard of a country could also be affected by a change in supply conditions in the precious metals industries. This happened to France in the 1850s. As we have seen France was theoretically on a bimetallic standard at a ratio of 15.12:1 from 1803 until 1870, but in fact most of its currency in circulation was silver. But in the middle of the century there came large gold discoveries: Russia in the 1840s, and the United States and California in the 1850s. This lowered the market price of gold below the French buying price with the result that France exchanged its silver for a gold currency. Gresham's law applies here also because the new supply conditions made gold the overvalued metal in France.

An equally famous example concerned Britain's movement toward the gold standard in the 18th century. The recoinage of the late 1690s had been a failure. Before the recoinage was complete, drawing on a report that was signed by Locke among others, the House of Commons established(54) a ratio of 15.12:1 at a time when the ratio in Holland (which at that time was the center for the precious metals markets) was 15:1; this was accomplished by rating the gold guinea at 21.12 instead of 22s. As a result about a 5 percent profit could be made by importing gold and having them minted into guineas, with the result that gold came to Britain and most of the newly-coined silver was exported.

By 1717 the situation had worsened and there was considerable agitation to prevent further losses of the silver coinage. To deal with the problem, much use was made of the brilliant report on the bimetallic ratios in different countries by Newton, Master of the Mint. It was concluded that the correction of the situation required a lowering of the value of gold relative to silver, with the result that the guinea was henceforth to be rated at 21 shillings. However, this reduction in the price of gold was not enough to erase the discrepancy between the English and Dutch ratios. With the guinea at 21s. the ratio was still 15.21:1 whereas in Holland and France, with increasing supplies entering Europe from Brazil, it was 15:1 or under. For this reason the practice of culling and exporting the heaviest silver pieces continued. A few decades later, by the accession of George III in 1760, the crown (silver) pieces had almost entirely disappeared and after 1774, when silver was partially demonetized, Britain had stumbled onto a de facto gold standard.

The models established above have assumed a small country faced a given bimetallic ratio in the rest of the world. This assumption, while simplifying the exposition, is by no means necessary. More generally the bimetallic ratio is determined by the interaction of the demands and supplies of the two metals in all the countries in the system. Bimetallism usually requires that at least one large country fix the ratio. Only a large country could "command" the ratio for any length of time; two or more large countries could ensure that it lasts even if their legal ratios were slightly different. Suppose that a large country fixes the ratio at 15.12:1 while other countries choose the same or different ratios. If the 15.12:1 ratio is consistent with market conditions, the large country will be on a bimetallic standard. Those countries that have fixed the ratio below that rate will have overpriced silver and put themselves on a silver standard; whereas those that have chosen a higher ratio will be on a gold standard. In a world of bimetallism, pluralism is the rule rather than the exception with so

1 2 3 4 5 6 7 8 9 10 11 12 13

Return to the The Gilded Opinion Index Page

(9)

 

 

USAGOLD sider, what we have to offer

Great prices. Quick delivery. All the time.
Contemporary gold and silver bullion coins
Bullion-related historic gold coins
U.S. $20 gold pieces

Order Desk
1-800-869-5115
Extension #100
6am to 5pm USMT weekdays.

Prefer e-mail to get started?
orderdesk@usagold.com


Reputation Matters!
Few can match our golden credentials

Zero complaints
Unblemished
stars client review record
(All reviews verified by BBB)

bbb
A+ Rating
Click for details
includes client reviews

Gold coins & bullion since 1973
Better Business Bureau accredited since 1991
American Numismatic Association since 1975
Industry Council for Tangible Assets since 1985
Website in continuous operation since 1997
__________________________________________

Recipient of BBB Gold Star Certificate

for zero complaints 2003 to 2015
(Program suspended 2016)
_________________________________________

What separates us from the competition


News & Views
Forecasts, Commentary & Analysis
on the Economy and Precious Metals


––OCTOBER, 2017––

Gold is up this year not just in dollars but in every major currency

Plus, How professional investors radically altered the gold market, and much more.

We invite you to sign-up for our free monthly newsletter with appreciation to our current and prospective clientele.

Immediate access to this month's edition.


Thinking about what to include in your precious metals portfolio?

We can help! We invite you to put our many years experience in the gold business to work for you. Helping you to assemble a portfolio designed for the times and your particular objectives is what we do. And we've been doing it for over 40 years with everyone from the small to the high net worth investor.

ORDER DESK
By e-mail or phone.


Contact information immediately above.
We welcome your inquiry.


video

Current Special Offers
Stuff our clients love


Our specials feature unusual and hard-to-find historic gold coins that trade at bullion-related prices.

These limited offers often sell-out quickly. For more information on our current offer, please call the Order Desk or visit this link at your earliest convenience.

Add a little scarcity and history to your precious metals portfolio.



OPEN ACCESS FILE

WHY GOLD, WHY NOW


For those seeking a deeper understanding of gold's role in the modern investment portfolio

brsov
A sovereign tale of gold's
historic undervaluation

Oil, gold and a hoard of British sovereigns
stashed in an old piano

swans
BlackSwans YellowGold
The standard reference on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation

compass
Gold Chartography 101
The case for gold ownership in ten charts
you will never see on CNBC

decisions

How would you invest money you didn't need for ten years?
"Perhaps we spend too much energy trying to foretell the future, and too little trying
to be resilient whatever happens."

______________________________

mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

ABC

"I keep six honest serving men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who."

– Rudyard Kipling –

Book Order Form (US)





Tuesday October 17
website support: sitemaster@usagold.com / general mail: admin@usagold.com
Site Map - Risk Disclosure - Privacy Policy - Shipping Policy - Terms of Use
© 1997-2017 USAGOLD All Rights Reserved
Mailing Address - P.O. Box 460009, Denver, CO USA 80246-0009
1-800-869-5115